Some type of tax reform could be forthcoming. President-elect Donald Trump lists cutting taxes among the legislative measures he wants to see passed during the first 100 days of his administration. Republicans in Congress, including House Speaker Paul Ryan, also want to cut taxes. Even Hillary Clinton included targeted tax cuts and tax relief measures in her campaign pledges.

As far as what the tax cuts would look like, the proposal Trump gave in October might offer some clues. Tax brackets would be narrowed to just three: 12% (capped at $75,000 for those married filing joint returns), 25% (capped at $225,000) and 33% (ordinary income above $225,000). The standard deduction would increase to $30,000 for married joint returns, but the personal exemption would be eliminated. Current capital gains tax rates would be maintained, but with carried interest taxed as ordinary income. The 3.8% net investment income surtax, which is part of the Affordable Care Act, would be repealed. The alternative minimum tax (AMT) would also be repealed.

Regardless of what you think about the proposed plan, changing the tax code is easier said than done. The complexity involved makes it difficult to convey changes without quickly causing eyes to glaze over. Sources of income differ. Deductions differ. A tax credit is not the same as a tax deduction. Behind each item in the tax code are special interests seeking to maintain or expand them.

Then there are the budget hawks in Congress. The president-elect wants to spend more on infrastructure. He also wants to eliminate the sequester on defense spending. It’s unknown how much the budget hawks on the Republican side will push back, or what specifically they’ll push back against.

In the background are the Democrats. Though they are the minority party, the Republican majority in the Senate is thin. Even objections from a small number of Republican senators would mean that assistance from the other side of the aisle will be needed to pass legislation.

In other words, tax reform—or more specifically, tax cuts—is not a certainty.

I’m not going to weigh in on what tax reform should encompass other than to say I am in favor of a so-called bipartisan grand bargain that addresses long-term spending, investment, the tax code and the national debt. The details as to what such a plan would look like are beyond the scope of my knowledge of public policy and fiscal issues. They are also certainly beyond the scope of news bites and catchphrases that important issues are too frequently boiled down to.

None of this changes what you and I will owe in taxes for 2016. In writing our annual tax guide, we rely on what the current laws and tax code are as opposed what they might be in the future. Whenever possible, we use Internal Revenue Service data. We were fortunate that most inflation adjustments for 2017 were announced far enough ahead of our deadline that we were able to incorporate them.

The inflation adjustments for 2017 were mostly increases of about 0.8%. Not every line item indexed to inflation was increased, however. The maximum limits on retirement savings contributions were kept unchanged, for instance. This does not mean you shouldn’t increase your savings, if possible to do so. Use every option available to you, such as Roth IRAs and the age 50+ catch-up contribution. Your savings decisions should not be based on the IRS’ inflation adjustments. (Should tax cuts be passed, consider diverting some of the extra money in your pocket to savings as well.)

Keep in mind that we are not tax experts. If you have a specific tax question, speak to a tax professional. While there is a cost, the value of good tax advice can exceed the hassle, and the potential penalties, stemming from an audit.

Wishing you a happy holiday season,

Charles Rotblut, CFA
Editor, AAII Journal
@CharlesRAAII